To pull the country's economy back from the edge of a recession, the Chinese government announced on November 5, 2008 plans for a stimulus package of 4 trillion RMB. The Chinese government has set a target of 8 percent GDP growth in 2009 with hopes that the stimulus plan will help it achieve this goal.

     

Amid fears of a public loss of confidence and deepening recession the Chinese media has been pressured to exhibit an upbeat and confident portrayal of the stimulus plan. However, as explained by Barry Naughton Professor of Chinese Economy at UC San Diego, the official stimulus figures espoused by the Chinese government and reported by the media hide the true extent and complexity of the initiative.

     

Of the 4 trillion RMB stimulus plan, the central government has only pledged to directly fund around 30 percent, with the rest being supplied by local governments. The stimulus money is to be parceled out through a centralized process that mimics the planned economy of previous decades. The central government has indicated to local governments the kinds of projects that it would like to see, and local governments have started applying for government funding within these guidelines. 

     

This has precipitated a massive number of submissions by local governments as it offers an opportunity for them to receive funding for pet projects. As such the amount of stimulus money requested by local governments already far exceeds the overall stimulus plan.

     

In their proposals, local governments must stipulate that amount of money they will put towards each project. The amount local governments pledge to provide influences their chances of receiving government backing and local governments have been keen to generously predict their expected contributions. According to Naughton: "For 2008–2009, the central government expects to lay out 588 billion RMB in incremental funding for the investment plan. At the same time, it expects the local governments to put in slightly more, 600 billion."

     

The Central government has opened various channels to help local governments raise the required funds. These include central government issued bonds, special long-term loans, and issuance of corporate debt.

     

The highly politicized nature of the stimulus plan and government action in loosening monetary policy have sent a clear message to officials and loan officers of the urgency and exceptionality of the implementation of the stimulus. As such, bank credit in China has increased at a tremendous rate. According to Naughton: "In the first quarter of 2009, total RMB bank loans outstanding increased by a whopping 4.6 trillion RMB. In other words, the increase in bank credit during three months in 2009 was more than the total stimulus package over more than two years ".

     

The stimulus therefore does not just represent central government investment, but also a movement that has started at the center of the political establishment and gained in potential impact as it moved outwards. The central government has exercised its influence over the periphery which has the potential to precipitate fundamental changes in the focus of government investment. This momentum has the potential to go beyond simple increases in government investment, and alter specific policy areas and sectors of the economy as the government uses this momentum to make necessary reforms. Reform in the healthcare system is one such example of the central government using the current downturn to tackle long needed reforms. Also relaxed government fiscal policy has enabled great amounts of capital to flow, snowballing the effect of the publicized stimulus.

     

Where is the money going?

     

The largest portion of the stimulus money, 50 percent, will be channeled to infrastructure development, including highways, railroads, and power grids. The investment in infrastructure is by far the largest portion of the stimulus, and according to the ministry of Railway, consumption of raw materials and employment of workers will contribute 1.5 percentage points to the 2009 GDP.

     

The second largest portion of the stimulus money is 25 percent or 1 trillion RMB for reconstruction of areas hit by the earthquake in Sichuan. This money had already been pledged by the government prior to the stimulus plan and thus does not represent any new government initiative.

     

Projects that develop rural infrastructure and improvement of the livelihoods of rural residents will receive 12 percent of the stimulus package; environmental projects will receive 7 percent; low cost housing projects will receive 13 percent research and development projects will receive 12 percent; and finally projects concerning investment in medical care and education will receive 5 percent (See Naughton).

     

The injection of government funds into the Chinese economy is aimed at boosting economic growth, supplying jobs, helping faltering industries and increasing efficiency of Chinese businesses. Another major objective of the current initiative is to increase domestic consumption as a long-term solution to export dependence. With decline in international demand, the Chinese government sees its own vast domestic market as a potential way out of stagnation.

     

As detailed by Dieter Ernest for Asia Pacific Bulletin, there has already been some success so far; "In March 2009, industrial production rose 8.3 percent, up from 2.8 percent in January and Febuary. Sequential growth of GDP has improved from 2 percent in the last quarter of 2008 to 5 percent in the first quarter of 2009". 

     

Criticism

     

However, while the rationale behind the stimulus is on facilitating consumption (See Yang Zhenglian), many critics maintain that the stimulus plan only partially deals with this concern and the focus of the plan to these ends is inadequate.

     

Many maintain that heavy investment by the government does not provide a long-term solution. While it may provide a stimulus to the economy now, its effect will be ephemeral. China cannot buy its way out of a recession.  Infrastructure aiding efficiency of transportation of goods is irrelevant as long as the majority of Chinese citizens' consumption capacity is limited. In 2008 consumption in China represented 50 percent of the nations GDP, compared to a world average of 70. Critics maintain that China needs to invest money in ways which will directly help it beef up consumption and reduce the country's abnormally high savings rate in a long term and sustainable way.

     

What is needed is  increased spending on China's social safety net, such as state subsidized medical care and education, particularly in rural areas. Other pro poor policies such as raising the income tax threshold would help reduce China's saving rate and increase domestic consumption (See Yang Zhenglian). While it is hoped that the high profile of the stimulus and the initiatives investment in China's patchy social safety net will boost popular confidence in the social service system enough to have some impact, the current provisions of the plan are not seen as adequate to have a long term solution.